Nearly every business is concerned about the quality of their customer service: The only way to succeed is to offer timely delivery of quality products and services at a competitive price. I learned this as a 20-year-old in the 1950s. But in Monitor Products’ 65 years as a maker of precision frequency control devices, the secret to success has been the same.
In seeking to serve our customers, we have always sought to collaborate with them. But partly because of rapid technological progress and an array of new products in our area, customers’ expectations these days have risen to unusual heights. That’s why I’m cautious about customer service. That’s why I’m taking a closer look at our major customers, the demands they are making, and whether or not we can satisfy them and still remain profitable.
How much are we spending on customer service? Is the real threat to Monitor Products to keep an account or to lose it? Must we try to meet each demand in the name of competition? Some of these conundrums may be far more acute for small- and moderate-sized companies. But without exception, businesses must balance the costs of losing customers against the possible costs of customer service itself. Our goal, like that of most smaller manufacturers, has always been to improve performance quality-if the costs of doing so are treated as prudent long-term investments in future business.
SEEKING TO MEASURE UP
Monitor Products’ efforts to improve its customer service have been particularly tough because our market expects suppliers to meet the same standards as larger, world-class companies. Interestingly, these companies often do not meet these standards themselves.
Companies most likely to take a “never-mind-the-costs” approach to quality are usually very profitable-or very large. American Airlines, for example, spent over $250,000 just to find ways to measure service quality for their passengers. I also recently read that Xerox spent $800,000 in its successful effort to win a Baldrige National Quality Award. But such efforts are generally beyond the means of smaller companies, including ours.
Meanwhile, these experiences raise an old question: Does profit drive quality, or does quality drive profit? Of course, the latter is the correct answer. But in a balanced, well-run business, other drivers include solid product engineering, vigorous marketing, well-trained personnel, and a host of other essentials.
I’m particularly wary because the emphasis on quality and customer service is becoming ever-more disconnected from issues of financial performance or profitability. For instance, the Baldrige Award is clearly a catalyst for improving corporate quality. Those who defend its enormous cost, however, ignore its impact on profitability. The Baldrige competition explicitly rules out financial performance as a criterion for evaluation, but I question this omission. What was the effect of the Baldrige competition on a previous award winner, Wallace Co., which recently entered Chapter 11?
Monitor Products has long sought to improve its customer-service efforts. But many of these improvements have come at no small price. In special products engineering, for example, we constructed a new clean-room facility to develop hybrid circuits. Its price tag, which exceeded $400,000, comprised our entire long-range budget for capital improvements. But I reasoned-correctly-that our future success would depend on our ability to design and manufacture such products. This has proved to be the case, and we feel confident that sales of hybrid products will continue to expand.
But in other areas, achieving payback on customer service efforts is more problematic. In terms of our output of specialized products, for example, the chances of satisfying all the expectations of a particular client are less than one in three (although by vigilantly monitoring and refining the production and distribution process we are able to narrow the odds). That’s partly because of the long lead time that separates the design, production, and shipment dates of a product. On such output, the entire production cycle may run 8-12 weeks.
In standard products-which comprise some 80 percent of our volume-it’s also tough to keep customers happy. Unlike specialized products, these are subject to narrow price ranges, high-quality specifications, and tight delivery times. Moreover, the risks of shipment cancellations and bad accounts receivable are greater. This type of account presents the greatest likelihood of customer turnover, or “churn.” If 2 percent of these accounts were “churned,” this could represent between $10,000 and $30,000 in lost revenues-not including costs related to marketing.
In light of these difficulties, we took a hard look at ways we could improve our customer service without jeopardizing the bottom line. Since we found that delayed shipments increased the dangers of a canceled order, we focused our efforts on improving our delivery time reliability. After several management workshops, we were able to realize a 15 percent improvement in average shipment times, and we reduced late shipments by more than 25 percent.
We also improved the tie-in between our customer service contact people and our engineering staff. Our engineers were often the only ones with the expertise to answer the technical aspects of customers’ questions. On the other side, our customer service people were more involved in the selling and shipping of standard products. Among other benefits, improving the relationship between the two groups provided faster and better information to customer accounts.
In addition, some of our major accounts are distributors, so it’s important for us to keep them satisfied. We frequently ship to 15 or 16 different locations across the country. The distributors represent about five percent of our total volume. From one point of view they are like a veil between us as the original source and the user in the field. Part of our customer-service strategy is to remove this veil, by improving our relations with distributors, field representatives, and end users alike.
The overall emphasis on quality means products are built to meet fine tolerances. A subassembly contract we reviewed recently was emblematic of the heightened customer expectations we’re up against. Our products were to be on a 30-day turnaround, with one-day order cancellation, backed up with a 60-day inventory on hand. The purchaser insisted that its vendors would meet these terms. But I viewed them as atrocious: Our production costs would have exceeded projected profits from this assembly contract three times over!
QUID PRO QUO?
Despite our customer-service efforts, the word I hear from some of my accounts is “inflexibility.” I’ve run into this in a number of different ways. Not too long ago, I had a $15,000 sale go awry because the requesting company refused to wait until its financial data was approved for a credit line. (It seems to me that some customers want us to meet the terms of our contract, but are surprised when we expect them to keep theirs.)
Is the account worth a gamble that we will be paid once a product is made and delivered? In electronics engineering, where product changes are rapid, the gamble is even greater. If the product life of a component to which we are supplying a key part is a year or less, then our financial exposure is increased if our payment dates are delayed for 60 or 90 days after products are received. This deserves extra consideration.
Also deserving scrutiny are customer service efforts for accounts that chronically change their orders. On a low-margin product, the changing of delivery one or two times can completely erase profits. The reason deliveries are changed is that companies want to turn their inventory upwards of 12 times a year. They ignore the fact that because of a change, a product can sit on the shelf of the vendor at a minimum cost of between one and 1.5 percent a month. At that rate, profit can disappear quickly.
Moreover, the inflexibility charge cuts both ways. To be sure, speed and timeliness are key aspects of customer service. Monitor Products supplies several accounts using the just-in-time inventory approach. But the JIT delivery window may be as small as to 0 days. It’s just as bad-in fact, worse-if I ship a few days early as if I ship late.
The “inflexibility” of this JIT concept for suppliers was exemplified in negotiations with one of my computer manufacturing accounts. My staff and I were meeting with their material evaluation team, a group of younger staff people with little or no experience in the manufacturing side of that company. I listened to a 15-minute lecture from this team about the deleterious effect on their company of early or late shipments. When they were finished, I asked their team if they understood the effects of late payments-a typical behavior of that company-on Monitor Products. The evaluation team dismissed the issue, claiming it was not their responsibility.
Even our larger manufacturers now raise conditions and terms that are causing us to reassess whether we should continue some current approaches to product supply. An example is Motorola, which has demanded that all of its suppliers apply for the Malcolm Baldrige National Quality Award within the next few years, or else be dropped as a Motorola vendor.
This customer’s expectation poses a delicate business decision. Does it make sense to invest in substantial restructuring and self-analysis in the name of competing for an account that you may not win after all? We had that experience some time ago with another major computer manufacturer. Our vendor relationship had been transferred from one manufacturing division to the corporate procurement office. We did all we could to keep that account. My engineering team visited them on several occasions. We talked to their key executives. Even obtaining an approved vendor status from senior management failed to protect our production contract. The new procurement office never lived up to their purchase agreement. Our production for the whole account-compared to the quantity actually ordered-caused us a bigger loss than would have been the case if we had taken less time to salvage it and stopped the production run sooner.
In sum, the best way to keep my customers-and to keep them satisfied-is to be careful about the kinds of customers we can serve profitably. Whether I appear to outsiders to be inflexible or simply cautious, I want to balance customer service strategies against market growth and marginal revenues. Even in recession, I need to be cautious about taking on new business that might cost more than it’s worth. For me, the balance between quality and profit is to maintain an average 10 percent pretax profit over 13-14 years.
To be sure, customer service is an important marketing tool in the search to attract new clients and retain old ones. But it’s undesirable to provide-or attempt to provide-services that detract from profitability and erode shareholder value.
Unfortunately, an increasing number of companies seem to be doing just that. That’s why I’m cautious about customer service.
John Blasier is president of Monitor Products, an $11 million Oceanside, CA-based manufacturer of precision frequency control devices. Joel J. Snyder is president of JSC, a San Diego-based consulting and management development firm.